Trade the Trend
Hi everyone, today I’m going to cover what I believe to be 10 of the most important rules to follow when you spread trade (I’m calling them my “10 Golden Rules of Spread Trading” because it sounds good!). I know there are loads of similar articles, etc out there containing similar lists of rules but I thought I’d give you my spin on what I think are the post important things based on my experiences over the last few years. Ordering these was a little tricky also, different lessons learnt over the years would show some more important than others at different stages, but I’ve tried to put the most important ones near the top and worked down the list from there.
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Never Trade With Money You Can’t Afford to Lose
This one is fairly obvious but really has to be top of the list. Just like investing in shares, spread trading can be risky business, infact given the leveraged nature of spread trading, it is actually a lot risker. You can, and most likely will, lose money on some of your trades, so therefore everytime you open a new spread trade you should should it go against you it’s money you can afford to lose.
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Never Buy A Stock Just Because Someone Else Is
There are always people out there tipping this share or that share, websites, blogs, tv, newspapers, friends, work colleuges, etc, etc.. I’ll be even at it on this blog! There is no harm in taking these tips on board but the important thing is that before you open a trade yourself that you have done your own research on the share in question. You need to be sure the share meets your own criteria for a trade and that your not just blindly opening the trade because someone else told you to or because you read about it somewhere.
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Take a Small Position
If you want your spread trading career to last any length of time worth talking about you need to preserve your capital. And the best way to preserve your capital is by managing your risk. And in my opinion the best ways to manage your risk are to take small positions (especially early in your early trades until you build up your trading capital) and to keep your stop losses tight (see point no. 4). Spread Trading is not a “Get Rich Quick” game and you should not be opening trades with the mindset that you are always going to be right and that you are going to make 1000’s of euro on each trade. That’s just not how it works. The best way to become a successful trader is to focus on making small but regular profits from your trades. So even though you may have enough trading resources in your account to open a €10 a tick trade on a particular share trading at $20.00 a share (or 2000), don’t do it, start with €1 a tick. Opening a €1 a tick trade may seem pointless initially, but if the stock rises to $24 or $25 and you make €400-500 that’s all you need initally. If you can have one or two of these trades on the go at anyone time you’ll soon build up the resources to trade larger stakes. If on the other hand you jump straight in there with your €10 a tick trade, yes the share might go to $24 or $25 and you would make €4,000-5,000 on the trade, but it could just as easily go against you and drop to $15 a share and then your nursing a €5,000 loss. It won’t take too many of those losses to bring an abrupt end to your spread trading career!
One final tip on this one, if you do trade small and hopefully make some money, don’t start beating yourself up about what you would have made if only you had put on a bigger stake per tick, be happy with your winning trade, learn from it and try repeat it again.
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Always Use a Stop Loss and Never Move It
Next up, Stop Losses, the bain of my trading life on many an occasion over the last few years! I’ve read and thought about some of the arguments for not using stop losses at all, but trust me it’s not worth it. You should always set one. And more importantly once you set it don’t fall into the tempation to move it if the share price starts getting close to it. I know from experience that there is probably nothing more frustrating then setting a Stop Loss at a certain level, watching a share come down to it and just barely take it out and then within a few hrs (or sometimes minutes) reverse straight back in the opposite direction, often moving to a price that would have made your initial trade profitable!
That said I have experienced way more examples where my Stop Loss came into play and helped limit my losses to that level as a share continued to fall well past what I had set my Stop Loss at.
I’ve also made the stupid mistake of moving my Stop Loss as the price got close to hitting it. Once or twice it worked out for me but more often than not I just ended up eventually closing out my position nursing a bigger loss than if I hadn’t moved my stop.
5. Trade the Trend
This one comes up again and again but there’s a reason for that, it’s because it works. There are all sorts of studies, analysis and statistics out there which show that a rising share price is more likely to keep rising then reverse and start falling. Likewise a falling share price is more likely to keep falling then reverse and start rising. It’s only a very small statistical bias but it’s still a bias all the same and you should use it to your advantage. So when you open a trade always look at the daily chart and make sure that it is clearly trending in one direction or the other. If it is trending upwards, make sure you are opening a Buy trade. If it is trending downwards, make sure you are opening a Sell trade. Don’t try trade against the trend, you may get lucky but invariably you are going against what the wider market believes and what they are doing with their money.
Ok, this post is working out a lot longer than I initially planned so I’m going to split it in two. I’ll follow-up with Golden Rules 6-10 tomorrow.
Happy Trading 
SpreadTrader.ie
